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Thursday, July 04, 2013

Doves dominate as central banks show the way ahead in Europe

While the US has its Independence Day, Europe looks to be having its Forward guidance day.

Bad puns aside, it’s actually been quite an interesting day in the world of central banking in Europe.

First we had the new Bank of England Governor Mark Carney surprising the markets somewhat suggesting that the increase in rates which had seemingly been priced in was premature. Essentially, providing forward guidance that the BoE would keep monetary policy loose.

More interesting for us though, was that the ECB took a similar despite not much being expected to come out of today’s meeting. Below are the key points from ECB President Mario Draghi’s press conference:
  • “The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.” This is essentially forward guidance (forecasting what policy will be in the future). It’s not full because there is no clear date set but still it is a big change from Draghi’s previous line of “we never pre-commit” (this has also been the line of the ECB generally since its inception). He also added at the end, “all in all we said our exit [from loose monetary policy] is very distant”.
  • Draghi also stressed that the decision on this form of ‘forward guidance’ was unanimous (numerous times in the Q&A). Again surprising since the Bundesbank has previously warned against the problems of loose monetary policy, so one might expect Bundesbank President Jens Weidmann to be wary of committing to it for an extended period.
  • When quizzed about whether the ECB was now simply reacting to the US Fed’s talk of tightening its monetary policy (the much maligned ‘taper’ which has sparked market volatility) Draghi insisted that the ECB takes its actions independently of those of any of the central bank. Behind the rhetoric though it seems fairly clear that the Fed’s policy has had an impact on European and global markets and the ECB felt the need to compensate for that. Draghi also said it was simply a “coincidence” that the BoE took a similar policy approach on the same day.
  • As for the rest of the press conference, it was much as expected (more of the same). Draghi continued to stress the need for structural reform and for the creation of a clear banking union with a working resolution mechanism to recapitalise banks in the event that ECB find capital shortfalls when it does its asset quality review (stress test) next year. Draghi also distanced the ECB once again from action to boost lending to small and medium sized enterprises.
It seems all this caught markets somewhat unawares with stock markets rallying and both the pound and the euro weakening in response.

This suggests that central bankers may have a trick or two still up their sleeve, although the response is likely to be short lived. Ultimately, this is not a sea-change in the policy of the ECB, the fundamental challenges facing Europe remain.


Rik said...

Looks like the whole PIGGS CS club will unlikely come under fire in the summerholiday. At least directly via the markets.
Cyprus, Greece and Portugal (one or more of them) are however likely to play up in that time.

They try to bully Cyprus back into its cage. A bit doubtful if that is the best strategy. Anyway these better follow the Greek example: 'empty promises'.

Hard to see that Northern parliaments can keep going for the Greek BS they get presented here especially re getting rid of civil servants in decent numbers. Simply no politicl will until they will be forced. Probably depend on the mood of the day and other issues playing at the same time or around it how this will play. IMF will be the difficult one to solve on this file. Ideal time to blackmail their way out as far as possible (just before the German elections).

Portugal is walking straight into a second bail out. Likely with PSI (more likely than not I would say, especially as the IMF is also onboard here). Which makes it a sort of selffulfilling prophecy. Rates will go up as a consequence of that until they drive against the wall. probably their banks will be hit hard.

Anyway likely some will play before the German elections. And could cause contagion to other countries:Spain, Italy and also France.

Anonymous said...

Any civilized people would have locked up these central "bankers" in 1913.

We should be arraigning them, not hanging on their every word.